We often come across a section in the auditors’ report titled “Emphasis of Matter” when reading through an audit report, especially that of a public listed company. The Emphasis of Matter is a way for the auditor to draw the users’ attention to a matter disclosed in the financial statements or a matter about the audit.
The Emphasis of Matter is usually present when the auditor, based upon his judgment, considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements. Such matters are usually critical to the user’s understanding of the financial statements or the audit.
Requirement for Emphasis of Matter
The first requirement to having an Emphasis of Matter paragraph in the auditors’ report is that the auditor must ensure that sufficient appropriate audit evidence has been obtained and that the matter is not materially misstated in the financial statements.
This means the auditor must first audit the relevant account balances, transactions, or events before he can include the Emphasis of Matter paragraph. He must ensure he has obtained sufficient and appropriate evidence to form a conclusion which ultimately supports his audit opinion on the financial statements.
Secondly, the Emphasis of Matter shall only refer to financial or non-financial information already presented or disclosed in the financial statements. The Emphasis of the Matter is not to provide additional information to the users of the financial statements but to highlight particular information that the auditor thinks the users of the financial statements should pay more attention to.
The auditor shall also communicate his reasons for including an Emphasis of Matter paragraph in the auditors’ report with those charged with governance, such as the audit committee.
Of course, this does not mean that the auditor’s decision on including an Emphasis of Matter paragraph is subject to communication with those charged with governance. It is more of a requirement that those charged with governance are made aware in advance.
Format of the Emphasis of Matter
To include the Emphasis of Matter paragraph in the auditors’ report, the auditor has to follow a pre-set format following the guidance of the local or international auditing standards.
In general, the Emphasis of Matter paragraph is included immediately after the audit opinion paragraph in the auditors’ report. The heading of that paragraph must be stated as “Emphasis of Matter,” although, under certain circumstances, other appropriate headings may be used.
The Emphasis of Matter paragraph should also clearly state where the emphasized matter is disclosed in the financial statements. Lastly, the auditor must indicate that the auditors’ opinion is not modified regarding the matter that is emphasized.
When is Emphasis of Matter required?
The Emphasis of Matter is maybe required when the below circumstances are present:
- There is uncertainty regarding the future outcome of a material legal case. For example, the company could be in the early stages of a legal proceeding in defending itself against a legal suit. If the plaintiff wins the lawsuit, the company could either be put out of business or potentially incur severe financial losses.
- The company has decided to adopt a new accounting standard early which has a pervasive impact on the financial statements. An early application usually means the company applied the new accounting standards ahead of the effective date required by local or internal accounting standard governing bodies. Pervasive impact means that the current year and comparative financial information disclosed could be materially different had the new accounting standard not been applied.
- There is a major catastrophe that had or continues to have a significant impact on the company’s financial position or performance. The recent COVID-19 pandemic is a perfect example. The hospitality and travel industries are heavily impacted by the pandemic and as such could make use of the Emphasis of Matter paragraph to bring the user’s attention to the relevant disclosures in the financial statements on how the pandemic has impacted their financial positions.
Things to take note of when including the Emphasis of Matter paragraph
The Emphasis of Matter should not be used lightly and frequently by the auditor as it may reduce the effectiveness of communicating a matter through Emphasis of Matter.
For example, the auditor should only include an Emphasis of Matter paragraph when he had concluded that the matter is significant to the users of financial statements or when one of the circumstances we discussed earlier arises.
The auditor should not include more information in the Emphasis of Matter than what is disclosed in the financial statements. This may indicate that the disclosures made in the financial statements are not sufficient in the first place.
It is important to remember that the Emphasis of Matter must only be used to highlight information already disclosed in the financial statements.
The Emphasis of Matter should not replace or include a disclosure that is already required by the relevant accounting standard. For instance, the Emphasis of Matter paragraph should not be used to disclose a major impairment not disclosed in the financial statements. Such disclosure is required by the relevant accounting standard and should be made in the financial statements.
The Emphasis of Matter should not replace the auditors’ opinion on whether the opinion is qualified, modified, or disclaimed. The Emphasis of Matter is merely to highlight a matter which has already been audited, and sufficient appropriate audit evidence has been obtained to form a conclusion on that matter. Its purpose is to help to support the overall audit opinion on the financial statements, not to form an opinion.
The Emphasis on Matter is very useful for the auditor to draw the users’ attention to a particular matter. This essentially helps the users of the financial statements to quickly focus on matters that could be material to their economic decision since financial statements contain many pages of financial and non-financial information.